Are you planning to be an entrepreneur? Starting a business is exciting and scary but can also be very confusing. There is a lot to plan and consider before you start your own venture. Before you actually start on your own, you need to decide what type of entity it will be. If you want to own the business entirely by yourself, you may register your business as a sole proprietorship. Alternatively, you may also register it as a partnership. But, if you want to separate your personal liability from the company’s liability, then you should go private limited company registration.
The type of business structure you will choose will impact how much you will pay in taxes, amount of paperwork required and the amount of personal liability you will be required to face.
Here in this article, we’ll assist you in understanding the Private Limited Company registration processes and its advantages, in particular, keeping in mind that India now has the third-highest number of startup incubators and accelerators in the world after China and the USA.
Entitling your business with a legal identity is extremely essential. You may also consider consulting a corporate lawyer for the same. Moreover, setting your business up as a Private Limited Company (PLC) is by far the most convenient way to go about it.
What is a Private Limited Company?
Understanding a PLC is a privately held company for small businesses. This type of business entity limits the owner’s liability to the shareholdings, the number of shareholders to 50, and limits shareholders from trading shares publicly.
There are two types of Private Limited Company-
A private limited company limited by shares- In this type of company the members liability is limited to the amount unpaid on shares held by them.
A private limited company by guarantee is the one where a member’s liability is limited to the amount that they have agreed to undertake at the time of winding up.
Benefits of Private Limited Company
1. Limited risk
The shareholders of a PLC have limited liability meaning that as a shareholder you will be liable to pay for the company’s liability only to the extent of the contribution that you have made.
2. Legal Entity
A PLC has a distinct legal entity from you meaning that the Company is responsible for the management of its assets and liabilities, creditors and debtors. However, you are not responsible for the same. Therefore, the creditors cannot proceed against you to recover money.
3. Business Continuity
PLCs enjoy permanent succession because the company is its own legal entity. Shareholders and employees act “as agents of the company”.
4. Raising Funds
Although private limited company registration comes with multiple compliance requirements, it is desired by entrepreneurs as it helps raise capital through equity and at the same time restrict the liability.
Indian Companies are registered under Companies Act with the Registrar of Companies (ROC). Moreover, anyone can check the details of the company as well as all the Directors through the Ministry of Corporate Affairs (MCA). Therefore, a PLC system of business is more trustworthy.
6. Tax Advantages
In addition to limited liability, PLCs even enjoy tax advantages. They pay corporation tax on their taxable profits and tend to be exempted from higher personal income tax rates. Forming a company instead of continuing as a sole trader or sole proprietor opens the door to more tax-deductible costs and allowances redeemable against profits.
PLC advantages over Public Company
First, for a Pvt Ltd company, a minimum number of shareholders required is 2, while, for a public company, you require a minimum of 7 shareholders.
Second, a public company is required to disclose its financial reports to the public every quarter of the year, as it affects public investment while a Pvt Ltd company is not subjected to any such compulsion.
Third, management and decision making is more complex and confusing in public companies as more number of shareholders are to be consulted. However, this complex procedure is eliminated in a PLC as the number of shareholders is less.
Fourth, a public company requires a minimum share capital of Rs. 5,00,000 whereas for a PLC, the earlier minimum number of share capital was Rs. 1,00,000, but now there is no such minimum compulsion. Therefore, there is no pressure of fund requirements.
Fifth, confidential information such as executive compensation, legal settlements, and other essential information cannot be kept reserved in public companies. Such information is more secure in a PLC.
Therefore, a PLC is a lot less complicated than a Public Company. Moreover, it is comparatively less expensive and less time-consuming to register a PLC.
However, the principal advantage of a Public Company is that it can raise funds at a larger scale without approaching banks and reducing debt while in a PLC, all the funds are raised by existing members, shareholders, investors and promoters. If a PLC goes public then the risk is also shared among the shareholders. Public companies once registered, get indirect promotions and support through stock exchange websites where their stocks are registered.